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Aluminum: Demand recovery pushes the market into deficit

Aluminum demand in 1QCY24 has surprised expectations, mainly led by China, whereas ex-China demand is showing signs of bottoming out. A combination of better demand and rigid supply, due to power shortages in China, pushes the market balance into a deficit in CY2024/25E from a surplus earlier. Metal prices further rallied in April 2024 on the news of sanctions on Russia by the US/UK. However, we do not see it as structurally impacting demand-supply as it should just realign trade flows. We upgrade our Ali price forecast by 6%/8% for FY2025/26E, and thus raise earnings/FV for HNDL, VEDL and NACL. HNDL remains our preferred pick and NACL is our top SELL.

Demand showing early signs of recovery

Subdued demand expectations at the start of 2024 led to low metal stocks by consumers and distributors. However, demand in 1QCY24 has shown tangible signs of recovery, leading to restocking ahead of a seasonally strong 2QCY24. CRU estimates China demand at +9% yoy, outpacing supply at +3.9% yoy in 1QCY24E. World,ex-China, demand continues to be muted, with 1QCY24E growth of 0.3%; however, the sequential improvement suggests a potential bottoming-out of demand. We upgrade our global demand estimates to 2.6%/1.5% yoy in CY2024/25E from 1.2%/0.6% earlier, mainly led by China.

Rigid supply pushes the market into a deficit

Smelter restarts in Yunnan, China, have been slower than expected. Forecasts of a deficit in the Yunnan power market in 2024 pose a risk of curtailments coming back in mid-2024. Further, the majority of new capacities in China are replacements of old plants, and only a few smelters are looking to restart in Europe. We estimate global production growth of 1.4%/1.3% yoy to underperform demand, resulting in a deficit of 0.4/0.5 mn tons in CY2024/25E. A deficit market should keep prices much above the cost curve. We upgrade our LME price forecast to US$2,500/2,600/ton (+6%/8%) for FY2025/26E versus spot at US$2,591/ton.

Sanctions on Russian metal should just realign trade flows; rally is unjustified

Aluminum prices have rallied by 6% in the last two weeks on the news of sanctions on new Russian supply by the US/UK and the risk of similar sanctions being imposed by Europe. We believe that the rally is not justified, as history has shown that such sanctions do not impact demand-supply. We note that: 1) Russian aluminum exports to the US/Europe have been declining; (2) Russian exports would continue to get realigned to non-US/UK countries such as China (38% of total Russian exports in CY2023 versus just ~10% in CY2021); and 3) existing Russian stock in LME (~90% of total stock) is exempt from these sanctions.

Maintain ADD on HNDL and SELL on NACL and VEDL

We build in a higher aluminum price forecast and significantly upgrade earnings and FV for HNDL, VEDL and NACL (refer to Exhibit 1). HNDL is our preferred play on aluminum given reasonable valuations and the improvement in end-market demand outlook at Novelis. NACL remains our top SELL on expensive valuations.

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